Buying a home is such an exciting time in life. Unfortunately, any number of issues can make it a stressful experience as well. One of the ways to avoid stress is to learn as much about the home buying process as possible ahead of time. This helps you make informed decisions and know what to expect when you find your dream home and are ready to make an offer. Unless you’re making a cash purchase, chances are you’ll obtain a mortgage loan to buy a new home.
It’s upsetting for everyone involved when an offer is made and accepted, but the deal falls through because the buyer didn’t qualify for financing. The more you understand a lender’s perspective, as well as the implications of a mortgage loan, the greater chance you’ll have to obtain loan approval.
Prequalification versus preapproval
You’ve probably heard people use the terms “prequalified” and “preapproved” interchangeably when discussing mortgage loans. Lenders understand, however, that these are not synonymous terms. In fact, they mean entirely different things. If you’re prequalified for a loan, it simply means that the numbers have been run and you’ve been given an estimate of how much money you can borrow to buy a home.
Preapproval, on the other hand, means that a lender has issued you a letter of approval after carefully analyzing your finances. It does not mean you are 100% guaranteed a loan. It does let a seller know, however, that a lender has carefully reviewed your finances, and it is likely that you will be able to obtain a mortgage loan as long as no major changes occur in your financial portfolio in the meantime.
Seeking preapproval on a mortgage loan is helpful in the home-buying process
It’s not uncommon for the entire process of buying a home to take several weeks or up to 30 days or more. When a seller is considering multiple offers, he or she is likely to lean toward the one that will take the least amount of time to close. If you attach a preapproval letter to your offer, it might catch the seller’s attention.
Think of it this way: You’ve already done a lot of the leg work that other prospective buyers who haven’t been preapproved will have to after the seller accepts their offer. If you were a seller with similar, multiple offers, wouldn’t you go with the one that will take the least amount of time to finalize? This is why it’s always best to seek preapproval before making an offer on a home.
Your house is a collateral asset for your mortgage loan
One of the most important things to remember about mortgage loans is to make sure you don’t bite off more than you can chew. When a lender agrees to loan you money to buy a house, that house is being used as collateral. If you ultimately take on a mortgage that you have no way of affording and then wind up in default, you could lose your home to foreclosure.
Always make sure that you will be able to pay back the amount you are borrowing, plus interest. Keeping these helpful mortgage tips in mind can save you a lot of time and money and can help you make the dream of owning your own home a reality.